401k Fee Disclosure: What Does It All Mean?

401k fee disclosure was a project in the works for many years, going back to the mid-2000s. Eventually the Department of Labor promised Congress it would create regulations requiring plans to disclosure fees charged by service providers. The purposes are two-fold. First, disclosures help plan administrators figure costs so they can assess whether fees are reasonable and shop for better deals. Second, the disclosures to participants is meant to better inform participants what they are paying for and help them see the fees paid for the different investments in their plans so they could make investment decisions with those fees in mind.

It’s important to consider these fees when choosing funds for your 401k plan, as they can eat into your returns over time. For example, a mutual fund with a 1% expense ratio will reduce your returns by 1% each year. Over a long period of time, such as 30 years, this can have a significant impact on your overall returns.

Mutual fund fees in 401k plans for employees

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Mutual funds play a crucial role in 401k plans, offering employees a variety of investment options to choose from. However, it’s important to be aware of the fees associated with these funds, as they can have a significant impact on your overall returns.

Mutual fund fees come in many forms, including expense ratios, sales charges, and account fees. Expense ratios are the most common type of fee, and they cover the cost of running the fund. They are expressed as a percentage of the fund’s assets and are taken directly from the fund’s returns. Sales charges, also known as load fees, are fees charged when you buy or sell shares in the fund. They can be front-end, back-end, or level-load fees, each with different implications for your investment. Account fees can include annual account maintenance fees, inactivity fees, or transfer fees. Mutual fund fees play an important role in the operation and financing of  your employer’s 401k plan.

Revenue sharing and 401k plans

Mutual fund fees and other 401k plan fees have been the source of litigation over the past ten years. Ever since the Department of Labor approved revenue sharing in the 1990s participants challenged these agreements as malicious kickback schemes. Revenue sharing is now common practice in almost all 401k plans. The way it works is the mutual fund provider charges a percentage of assets in the fund as a fee for operating the plan but in exchange for the 401k plan offering the provider’s fund to the plan they give a portion of the fee back to the plan to offset administrative expenses to the plan. It creates a financial incentive for the plan administrator (often your employer) to choose a service provider who will cover plan expenses with revenue sharing in exchange for offering the service provider’s mutual funds.

It sounds like a win-win except the plan, due to the size of assets held in the plan, may be able to negotiate for lower fees, find funds with lower fees, or chose better performing funds, but the plan administrator may not because the more shared revenue means less cost to them. The plan administrator has a duty to participants to choose investments that benefit the participants. However, thanks to revenue sharing, that doesn’t always happen.

Impact of mutual fund fees on retirement savings for employees

If you look at the funds in your 401k, you probably see the fund fees between 0.1-3% of assets. That means each year the fund charges that percent of all your investment in that fund. The DOL calculates that a 1% fee over working years erodes 28% of savings. So while 1% may not be a big number each year, over time it adds up.

As an employment lawyer and divorce attorney I see how 401ks and other retirement plan issues affect workers and their families. Losing retirement savings can severely set back retirement plans, financial stability and deplete an emergency financial resource. Although 401k fees do not completely drain retirement savings, a loss of 28% is a significant amount. Losing over a quarter of retirement savings as an effect. Workers must work longer to make up the lost savings. That puts them more at risk for age discrimination.

Other investment options in 401k plans

The good news is that 401k plans often offer low-cost options, such as index funds and exchange-traded funds (ETFs), which typically have lower expense ratios than actively managed funds. Additionally, many 401k plans offer institutional class shares of mutual funds, which are typically lower cost than retail class shares and are only available to 401k participants.

It’s also important to consider the sales charges associated with each fund. Front-end load fees are taken out of your investment upfront, reducing the amount you have to invest. Back-end load fees are taken out when you sell your shares, which can be more manageable if you plan to hold onto your investment for a long period of time. Level-load fees are taken out over time, so they have a more gradual impact on your returns.


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